Tuesday, June 30, 2015

Grexit: World may suffer with Greece

Currently, the world is going nuts over the Greek dilemma. The surprising move by the President of Greece, Mr. Alexis Tsipras to call for a referendum on EU bailout conditions, have stumped many of the EU's leaders that they have started to openly vilify Mr. Alexis Tsipras. While the world would know Greece's decision by the start of next week, in the mean time Mr. Tsipras has closed the banks and stock-exchange to prevent financial collapse.

Greece's bold move

In my previous post, I had argued that austerity is likely to lead a country into a vicious cycle. As austerity tends to reduce disposable income, people may tend to be frugal which could further aggravate the problem. Austerity is also likely to cause unsurmountable hardships to the citizens of the nation. Hence, I regard Mr. Tsipras move for a referendum bold and creative. Apparently, the move have stumped the EU leaders' expectation that Mr. Tsipras could be pressured to submission as is apparent by their open personal attacks on him. If anything, he might be on the right track.

Greece is not without precedent. Many countries have defaulted and have recovered from the financial crisis in the wake of such default to become strong economies. In case, on July 5th, Greece rejects EU's proposal it may its exit from EU. In such case, Greece is at liberty to issue its own currency. Though the currency might start on par with Euro, it would soon be devalued which may increase inflation sharply. However, such devaluation may also turn out to be a boon as it could boost exports there by setting Greece on its path to recovery. The period of intense economic hardships due to inflation would have severe effects on the lives of the people. However, I hardly doubt if the situation would be any different if Greece accepts EU's proposal.

However, Greece should guard itself against continuing to commit the mistakes that had led it into the crisis - corruption and tax evasion. If the tax is not friendly or is felt unjustified, it is likely to encourage corruption and tax evasion. With increasing tax evasion, the country is unlikely to increase its revenue, which is critical for its recovery from the debt-trap.

Greece Exist cost more to EU

I believe Greece's exist from EU is likely to affect the other nations in EU more than the Greece itself. Greece's exit would mean a fracture in the political union of Europe. It is likely that other countries like Ireland and Spain may follow suit plunging Europe into financial crisis, affecting markets and resulting in financial instability whose effects would be felt all over the world. Euro would lose its value plunging EU into high inflation.

A fractured EU would likely see EU's influence diminished in the World politics. Greece is already trying to woo Russia to invest. In such case, the NATO allies may not be particularly comfortable knowing the growing influence of Russia in their backyard. In addition, China is also buying off Greece's debts, which would likely increase China's influence in the region.

Greece's exit at this juncture would also be inopportune as UK is in the process of conducting a referendum to decide whether to continue with EU or not. In case of Greece's exit, the anti-EU parties' claims could find support, which may further weaken EU.

Hence, Greece's tragedy is likely a EU's tragedy and may likely to lead to many set-backs, economic and strategic. I'm sure the EU leaders are not oblivious to the reality but their dogged insistent ofn austerity makes anyone wonder the reason behind their insistence...

In any case, the world would know Greece's verdict by Sunday evening...